VendEx Solutions has been working with the Investment Association and some of its members to address some common challenges around Annual Management Charge (AMC) rebate processing, including administrative complexities and compliance risks. VendEx has identified and developed technology that can be leveraged to digitize its compliance, processing, and reporting.

Background to AMC Rebates:

Authorized Fund Managers (AFMs) regularly settle annual management fee rebates to their authorized broker network and their investor clients. This is common practice in order to provide a mechanism to effectively create bespoke ‘net’ charging of annual management fees. These rebates are fraught with challenges, including:

  • Data sitting external to core systems
  • Payment processing terms overlapping with key fund operations cycles (thereby straining middle office resources)
  • Manual entry calculations and reconciliations within spreadsheets or internal systems resulting in a time-consuming process fraught with operational risks

This is all compounded by the fact that these typically reference bespoke rebate agreements, which have their own associated reporting complexities required in a timely fashion to internal and external market stakeholders.

John Allan, Fund Operations Specialist at the Investment Association, said “It has been extremely useful to surface these collective industry issues and see where the fintech community might be able to help make the process more efficient or robust.”

To address these challenges, the buy-side industry is taking into consideration digital solutions, coordinating the efforts of those investment managers affected by these challenges by hosting a flexible platform solution that will benefit all the key stakeholders.  Such a solution would need to help these investment managers centralize their contract inventory of agreements that contain rebates, while in turn facilitating the digitization of the content embedded within these respective agreements. This can include an automated calculation or algorithm to digitize and execute the payment of these rebates, based on information digitized from these same agreements. Furthermore, the digitization of the core terms and conditions within these AMC agreements can capture (using the latest technologies) the idiosyncratic features embedded within these contracts, which otherwise would go unnoticed, and would thus satisfy compliance and audit personnel.

As an example, one common rebate calculation is based on a tiered structure.  If an automated system can capture key fields such as dates, tier bands, key percentages, and currency, then the routine performance of the rebate calculation can be automated.

Sample rebate text:

The Client will be entitled to a rebate (“Rebate Rate”) as set out below:

Total AUM Rebate Rate Current Management Fee Effective Management Fee
US$0-75m 0.25% 0.75% 0.50%
US$75-150m 0.27% 0.75% 0.48%
Above US$150m 0.30% 0.75% 0.45%
  • The Manager shall calculate the rebate on a daily basis as set out below.
  • The rebate shall be paid quarterly in arrears.
  • The Manager shall provide to the Client a report, detailing the calculations.
Rebate = ∑ (Rebate Rate x Shares x NAV per share)
Number of days in the calendar year

Sample digitization of rebate calculation inputs:

Field Name Field Format Sample Data
Rebate Recipient From API Customer Name
Contract/Mgmt Fee Rebate Applies to Text Contract Identifier
Original Payment Status Paid/Unpaid Paid
Rebate Start Date Date (DD-Jan-YYYY) 01-Jan-2020
Rebate End Date Date (DD-Jan-YYYY) 31-Dec-2025
Rebate Currency Drop-down USD
Rebate Calculation Type Drop-down (Flat Rate/Tiered/etc.) Tiered
Tier 1 Upper Limit Number (US$mm) 75
Tier 2 Upper Limit Number (US$mm) 150
Tier 1 Rate Number (%) 0.25
Tier 2 Rate Number (%) 0.27
Tier 3 Rate Number (%) 0.30
Rebate Calculation Frequency Drop-down Daily
Rebate Payment Frequency Drop-down Quarterly, arrears

Sample rebate calculation:

After collection of Daily NAVs (eg: average US$1mm/sh), # of Shares (eg: average 2,500), and AUMs (eg: average 125m), # days in current calendar quarter (eg: 90), # days in current calendar year (eg: 365)

Rebate = ∑ (Rebate Rate x Shares x NAV per share) = ∑ (0.27% x 2,500 x 1,000,000)
Number of days in the calendar year 365
= USD $1,664,383.56

Conclusion

A combination of contract digitization, calculation automation, and forecasting abilities would address the vast majority of the needs of those members struggling to modernize their AMC rebate calculations. VendEx believes that the use of advanced data management technologies such as OCR, proprietary algorithms, and sophisticated database infrastructures ALL within a platform would present the industry with a viable solution to digitizing AMC rebates. With the use of an open-ended architecture environment, the various internal and third-party systems where the underlying documentation is currently stored can integrate and plug into a new environment that solves for these ongoing reporting requirements.